One of Britain’s biggest dairy producers is on the verge of a deal to exploit vast Chinese demand for baby-milk formula by exporting whey produced at a factory in Cornwall.
Dairy Crest Group, whose biggest-selling brands include Cathedral City cheese and Clover butter, is poised to sign an agreement with Fonterra, a New Zealand-based company, to give it a crucial foothold in the world’s largest country by population.
The strategic partnership between the two companies could be announced as soon as next week, according to people close to the talks.
It will potentially be of enormous significance for Dairy Crest, which has a market capitalisation of just over £630m.
Mark Allen, its chief executive, has said for some time that he wants to diversify its revenue base by expanding internationally and into new areas.
The alliance with Fonterra, which is expected to involve a profit-sharing agreement, will involve Dairy Crest removing minerals from whey produced at its creamery in Davidstow in Cornwall.
The demineralised whey will be sold to Fonterra, which will then use it to create infant milk formula for the Chinese and other markets.
Whey is the liquid produced during the manufacturing of cheese, and is an essential ingredient in baby milk formula.
Demand for baby milk powder in China has soared as hundreds of millions of people enter the country’s middle classes and become wealthy enough to afford a product which until recently was seen as an expensive luxury.
Foreign brands usually sell at a significant premium to domestic Chinese names because of a widespread perception that they are of higher quality.
Dairy Crest’s decision to go into business with Fonterra nevertheless comes at an awkward time for the New Zealand-based group, which describes itself as the world’s leading milk processor and dairy exporter.
Last year, a food scare involving Fonterra’s baby milk powder was found to contain whey protein contaminated with bacteria that can cause botulism, a dangerous form of food poisoning.
The company apologised for the lapse, but China’s Food and Drug Administration said it would intensify its monitoring of production standards and punish companies found not to be adhering to guidelines.
Last week, New Zealand’s High Court in Auckland heard evidence in a case in which Danone (Paris: FR0000120644 – news) , the French food giant, is suing Fonterra for allegedly misleading it during the botulism scandal.
Fonterra was also fined along with a handful of other groups for colluding to fix milk prices in China last year.
If its partnership with Fonterra is successful, it would give Dairy Crest a significant boost as it attempts to reduce the proportion of its sales derived from the low-margin liquid milk sector in the UK.
Like rivals, it has been caught in an intense price war among major grocers, with deep discounters such as Aldi and Lidl making substantial market share gains from the likes of Tesco (Xetra: TCO.DE – news) and Wm Morrison.
Dairy Crest has committed to a £45m investment in its Cornish plant to pave the way for the planned increase in whey production from next year.
It said last September that annual profits could increase by £5m as a consequence of the investment.
The company declined to comment on Saturday
Source: Sky News